Ukraine passes law criminalizing illegal enrichment of officials

At the time of publication, the bill was awaiting signature by the head of state.

This bill contains a number of innovations:

First, it reinstates criminal penalties for the illegal enrichment of officials on a particularly large scale, introducing a new Article 368-5 of the Criminal Code "On Illegal Income," which provides for punishment in the form of imprisonment for a term of 5 to 10 years with the loss of the right to hold certain positions or engage in certain activities for up to 3 years. It should be noted that in early 2019, the Constitutional Court of Ukraine (CCU) recognized such norms as contrary to the country's Constitution;
Second, the bill introduces a civil forfeiture tool for illegal assets of officials. Forfeiture will take place in a special procedure by court decision without a conviction. Thus, in addition to criminal liability for illegal enrichment, the new bill also provides for civil liability.
Third, the bill establishes a new mechanism for identifying and registering illegal income of officials: it will be implemented by special anti-corruption bodies in conjunction with the prosecutor's office.

The development of the bill was initiated by Ukrainian President Volodymyr Zelensky and, according to the Office of the President, was carried out in cooperation with foreign experts.

Decision of the Constitutional Court of Ukraine to abolish punishment for illegal enrichment

Penalties for illegal enrichment of officials in Ukraine were first introduced in 2015. They were provided for in Article 368-2 of the Criminal Code of Ukraine, "Illegal Enrichment." Criminal liability arose for the acquisition of assets of significant value by a person authorized to perform state or municipal functions, the legality of the grounds for the acquisition of which was not confirmed, as well as for the transfer of such assets to third parties. The article was introduced as part of anti-corruption reforms and remained in the Criminal Code of Ukraine for four years.

In February 2019, the Constitutional Court of Ukraine found the article to be inconsistent with the Basic Law of Ukraine and ruled to exclude it from criminal legislation. The Constitutional Court justified its decision by stating that "illegal enrichment" is defined in the article as "funds whose legal basis for acquisition has not been confirmed," and that such wording allows for the criminal prosecution of officials who have acquired assets legally but are unable to confirm the legality of their acquisition.

According to the Court, this approach to the criminalization of illegal enrichment obliges the defense to prove the legality of the origin of its assets, which violates the principle of presumption of innocence and the principle of inadmissibility of holding a person liable for refusing to give testimony or explanations regarding themselves, family members, or close relatives, which does not comply with Articles 62 and 63 of the Constitution of Ukraine. In addition, the Constitutional Court concluded that Article 368-2 of the Criminal Code "does not meet the requirements of clarity, accuracy, and unambiguity, and therefore contradicts legal certainty as a component of the principle of the rule of law enshrined in Article 8 of the Constitution of Ukraine."

Simultaneously with the announcement of the Constitutional Court's decision on the decriminalization of illegal enrichment, 65 criminal cases under the relevant article, which were at the pre-trial investigation stage, were automatically closed.

A new approach to illicit enrichment

Article 368-2 of the Criminal Code of Ukraine criminalized the acquisition of assets whose legality had not been proven, with their size being determined by abstract values ("in a significant amount") without specific monetary indicators. The new Article 368-5 of the Criminal Code of Ukraine, proposed in the draft law, uses a different approach to defining illegal enrichment, which completely changes the composition of the crime.

In particular, it is proposed to recognize as illegal enrichment the acquisition by an official of assets whose value exceeds his or her legal income by more than 6,500 tax-free subsistence minimums. The notes to the article also clarify the concepts of "legal income" and "assets." In addition to cash and property, the concept of "assets" now includes cryptocurrencies and the reduction of financial obligations.

As already noted, the bill is not limited to introducing criminal liability for illegal enrichment, but also provides for civil liability. The institution of civil forfeiture is being introduced to seize illegal income. Thus, according to the document, a claim for recognition of income as illegal may be brought against an official in the event that he or she acquires assets whose value exceeds his or her legal income by more than 500 tax-free subsistence minimums, without the need for a conviction against the individual. Moreover, the bill establishes a four-year statute of limitations, which means that the provisions of the law may be applied to any assets acquired by officials within four years prior to the date of its adoption.

Mechanism for registering and seizing illegal assets

The bill introduces a new mechanism for identifying, registering, and seizing illegally acquired assets. The identification and registration of illegal funds will be carried out as part of a preliminary investigation. As before, the National Agency for Corruption Prevention (NACP) will be responsible for the initial verification of officials' electronic declarations. If information about possible misrepresentation is found in the declarations, the civil servant will be given 10 days to explain the source of acquisition of certain assets.

At the same time, the NACP will forward information about suspicious declarations to the National Anti-Corruption Bureau of Ukraine (NABU) and the State Bureau of Investigations (SBI), which are responsible for gathering evidence of the illegal acquisition of the identified assets. The NACP is also required to notify the Specialized Anti-Corruption Prosecutor's Office (SAPO) or the Office of the Prosecutor General of Ukraine of all evidence of illegal enrichment that has been identified.

At the same time, the NACP and the SBI are entitled to request information from banks for use as evidence in court proceedings. Such powers imply automatic access by these authorities to information constituting banking secrecy. In addition, the NABU will have the right to request information for investigation from state bodies, as well as from a wide range of enterprises, institutions, and organizations. After obtaining sufficient evidence, a lawsuit will be filed to declare such assets illegal.

All cases of illegal enrichment of officials will fall under the jurisdiction of the newly created High Anti-Corruption Court of Ukraine. Information on all confiscated funds will be entered into the Unified State Register of Assets, and the assets themselves will be distributed to the state budget of Ukraine. If it is not possible to seize property acquired with illegal income, the official will be obliged to pay the state an amount equivalent to its monetary value.

Prospects for the criminalization of illegal enrichment

According to experts at Transparency International Ukraine, the institution of civil forfeiture of illegal assets could become an effective tool for replenishing the country's budget. It is expected that this process will be fairly quick, as civil forfeiture does not require the initiation of criminal proceedings. The statute of limitations included in the bill also offers certain advantages, allowing for the reopening of 65 criminal cases of illegal trafficking that were closed after Article 368-2 of the Criminal Code of Ukraine was declared unconstitutional.

Nevertheless, TI-Ukraine notes that the Ukrainian authorities are obliged to do everything possible to prevent violations of property rights. To this end, they must ensure the effectiveness and independence of the judicial system, as the adoption of the law will give judges broad powers in the use of civil forfeiture.

Ukraine's obligations to its Western partners

The criminalization of illegal enrichment of officials in Ukraine was an important condition for the country to fulfill the provisions of the Association Agreement between Ukraine and the European Union, as well as one of its obligations to the International Monetary Fund (IMF).

Ukraine's foreign partners expressed their concern after the Constitutional Court of Ukraine declared Article 368-2 of the Criminal Code unconstitutional. EU representatives disagreed with the argument that the article should be removed from the Criminal Code and demanded that the Ukrainian authorities recriminalize the illegal enrichment of officials, as this measure is necessary for the logical continuation of anti-corruption reforms and, as a result, further cooperation with Ukraine. Therefore, the adoption of this bill is particularly important for Kyiv: by the end of the year, the Ukrainian authorities plan to agree with the International Monetary Fund on a new support program worth $5-6 billion.

UPDATE: Law No. 263-IX of October 31, 2019, "On Amendments to Certain Legislative Acts of Ukraine on the Confiscation of Illegal Assets of Persons Authorized to Perform State or Municipal Functions and Punishment for the Acquisition of Such Assets" came into force on November 28, 2019.